Asset Bubbles

The Economist has long urged that the Fed watch for asset bubbles, rather than simply the rate of traditional inflation. In the late 90's, the magazine was concerned with stock prices; now, it's home prices.

My thought: the situations are dissimilar enough that I could oppose intervention on stocks and support it on house prices.

1. An attempt for the Fed to impose its sense of fair value on the stock market - rather than trusting to market forces - may be defensible intellectually, but could have been fatal politically to the Fed's independence, which is always at least subtly under pressure by the Congress and the Executive branch, particularly with the chorus (at the time) or Respectable Opinions that said (1) the market had been undervalued historically compared to other asset classes because rick was overestimated and hence the risk premium excessive; (2) we had entered a new era, with IT-driven productivity growth and the absolute need for enormous Boomer generation to start accummulating savings. The fire would have come from both the Left (heirs to the Cross of Gold speech) and the Adam Smiths of the Right. The fight-inflation mandate had broad, although not universal, support. Also, there were not clear losers from the stock market rise - late investors might get fewer shares for their money, but their focus tended to be on return, not absolute sale price. The market was the very definition of elastic. If it was the Fed which deflated or restrained the market, the accusation that it had betrayed investors would have been as loud as the cry that the German government failed its army in WWI.

2. The housing market has different constraints. Unlike treating 50 shares and a 100 shares at different times as being similar investments, half a house is clearly a different thing, especially with the expectations due to the rising size of new homes. Entry is much more difficult, even eased with zero percent down mortgages and similar risky investments. There are very clearly losers in the game: new entrants, those moving from low cost to high cost areas, and those at risk or going underater or being unable to service their mortgages. Increased costs of servicing the loans has an eventual long-term impact on money available for consumption and productive investment. Funding consumer purchases with equity is ultimately unsustainable. The downside of a dramatic market reversal is greater than the 2000 stock market bubble bursting, with ripple effects from a consumer spending downturn from tightened credit and a great increase in foreclosures, harming both the lending institutions and, most dramatically, the potentially homeless - or at least assetless. And then there's the implicit government guarantees of Fannie and Freddie Mac. Any, a soft landing seems to be required here.

Besides, since housing is ALSO a consumer good, not merely an investment, its properly weighted position in inflation considerations as a very substantial portion of the outlay of the average American: well, there you go.

Orwell-ish note

The similarity betweem "inequality" and "inequity" is particularly unfortunate, not because they have nothing to do with each other, but because they do - without being anything close to identical. People tend to eradicate important semantic differences because they find keeping too many in mind is simply too taxing on their poor befuddled brains, and when the words themselves adhere, well - it's all over for reasoned conversation.